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Fed signals no rush to tighten - 25.5.2017

S&P 500 hits record high in fifth session of consecutive gains

US stocks extended gains on Wednesday despite the minutes of Federal Reserve’s May policy meeting showed policy makers agreed to begin shrinking the central bank’s balance sheet and pointed to a likely rate increase in June. The dollar resumed the slide: the live dollar index data show the ICE US Dollar index, a measure of the dollar’s strength against a basket of six rival currencies, closed down 0.28% at 97.08. The S&P 500 gained 0.3% settling at record high 2404.39, advancing for fifth consecutive session. The Dow Jones industrial average rose 0.5% to 21012.42. Nasdaq index added 0.4% to 6163.02.

Treasury yields fell Wednesday despite the minutes indicated the central bank plans reducing the size of its Treasurys holdings. Minutes from the May meeting of the Federal Open Market Committee showed there was broad agreement among Fed officials to reduce the Fed’s $4.5 trillion balance sheet by gradually halting the reinvestment of principal from maturing securities. The minutes sounded cautious about the timing of next rate hike stating FOMC members agreed to await additional evidence that the recent slowing in the pace of economic activity had been transitory. However CME Group’s FedWatch tool shows fed funds futures traders price in a 83% chance of a June rate hike. Economic data were mixed: existing home sales fell 2.3% in April due to low inventory. Today at 14:30 CET initial jobless claims and unemployment claims will be released, as well as Wholesale and Retail Inventories for April. The tentative outlook is neutral. At the same time the Advance Goods Trade Balance for April will be published, the deficit is expected to decline slightly to $64.6 billion from $64.8 billion in March. At 16:30 CET natural gas storage change will be released by Energy Information Administration.

Draghi sees no need to change ECB policy

European stocks ended mostly lower on Wednesday as investors avoided making big bets ahead of the Fed minutes release. Both the euro and British Pound resumed gains against the dollar. Germany’s DAX 30 ended 0.1% lower at 12642.87. France’s CAC 40 fell 0.1% but UK’s FTSE 100 index rose 0.4% settling at 7514.9 lifting also the Stoxx Europe 600 index 0.1%.

Euro was helped by dovish speech of European Central Bank president Draghi in Madrid. Draghi said he doesn’t see it necessary to change the ECB’s asset purchase program as underlying inflation pressures are still subdued though there has been “an increasingly solid recovery” in euro-zone economy. Today at 10:30 CET Q1 GDP will be released in UK, the outlook is neutral for the British Pound.

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Asian stocks rise in the wake of China’s ratings downgrade by Moody’s

Asian stock indices are rising today underpinned by Federal Reserve’s cautious approach to future rate hikes and gradual pace of reduction of its balance sheet. Nikkei ended 0.4% higher at 19813.13 as the dollar resumed the growth against the yen. Chinese stocks are up in the wake of Moodys downgrade the previous day: Shanghai Composite Index is 1.4% higher and Hong Kong’s Hang Seng Index is up 0.8%. Australia’s All Ordinaries Index is 0.3% higher as the Australian dollar pulled back against the US dollar.

Major producers of oil expected to extend output cut agreement today

Oil futures prices are rising today as traders expect the Organization of the Petroleum Exporting Countries and other major producers will extend output cut agreement at meeting in Vienna today. Prices ended lower yesterday ahead of the meeting of the major producers. A joint committee of OPEC and other major producers on Wednesday recommended a nine-month extension to the production-cut agreement that expires in June, but there has been talk of a potential one-year extension, to the end of June 2018. July Brent crude fell 0.4% to $53.96 a barrel on Wednesday on London’s ICE Futures exchange despite the US Energy Information Administration report US crude supplies fell 4.4 million barrels, a seventh week in a row.

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